Earthlink 2004 Annual Report Download - page 55

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not a VIE or if it is a VIE and we are not the primary beneficiary, management evaluates whether we should include our proportionate share of
the investee’s operating results in our results pursuant to Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of
Accounting for Investments In Common Stock,” and related interpretations because we may be able to significantly influence financial and
operating policies of the investee or whether we should consolidate the results based on our ability to control the operating and financial
policies of the investee.
The assessment as to whether the investee is a VIE, whether we are the primary beneficiary, and whether we can exert significant
influence over or control the operating and financial policies of the investee requires estimates and judgments. We have an investment in one
VIE, EVG, but management has determined that we are not the primary beneficiary. Management determined that the other investees are not
VIEs and that we cannot significantly influence the operating and financial policies of any of the investees. Consequently, all investments in
other companies are included in other long-term assets and are accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are only adjusted for other-than-temporary declines in fair value and distributions of
earnings. We have one investment in a company accounted for under the cost method whose stock has a readily determinable market value.
When our investment has a readily determinable market value based on quoted prices on a national exchange, we adjust the carrying value of
the investment to market value through “unrealized gains (losses) on investments” which is included as a component of stockholders’ equity.
With respect to our planned investment in the SK-EarthLink joint venture, we do not believe SK-EarthLink will qualify as a VIE, but we
expect to be able to exert significant influence over SK-EarthLink’s operating and financial policies. As a result, we expect to apply the equity
method to our investment in SK-EarthLink and record our proportionate share of SK-EarthLink’s net income (loss) in our statement of
operations as “net earnings (losses) of equity affiliates,” which is expected to adversely affect our net results in the near term. However, this
accounting treatment is subject to change as SK-EarthLink enters into financial and operating arrangements that impact the joint venture
partners’ economic and voting interests.
Recently Issued Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments.” The objective of EITF Issue No. 03-1 is to provide guidance for identifying other-than-
temporarily
impaired investments. EITF Issue No. 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-
1 that delays the effective date of the measurement and
recognition guidance in EITF Issue No. 03-1 until further notice. The disclosure requirements of EITF Issue No. 03-1 are effective for the year
ended December 31, 2004. Once the FASB reaches a final decision on the measurement and recognition provisions, we will evaluate the
impact of the adoption of the accounting provisions of EITF Issue No. 03-1.
In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123 (R) requires that compensation cost relating to all share-based
payment transactions, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative. SFAS No. 123 (R) is effective the first interim or annual reporting period that begins after June 15,
2005. We expect to adopt SFAS No. 123 (R) on July 1, 2005 and expect to apply the modified prospective method upon adoption. The
modified prospective method requires companies to record compensation cost beginning with the effective date (a) based on the requirements
of SFAS No. 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all
awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date.
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